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Another round of volatility we have seen last week was mainly caused by a series of events, among which we highlight greater regulatory pressures from the Government and the Chinese regulator, the meeting of the US Federal Reserve and the publication of results of the tech giants.
In the first case, China’s decision to reform private education triggered a sharp drop in the Hong Kong stock market. According to new rules, school support companies will now have to register as non-profit associations. In addition, they will no longer be able to teach on weekends and holidays or during school holidays.
Thus, now education companies will no longer be able to actually earn money, attract foreign investment and go public. Organizations are even prohibited from hiring foreigners to teach in China and use study abroad programs. In theory, the aim of the sporadic decision was an attempt to ease the financial pressure on families preventing the birth of children. Spending on a child’s education is believed to be one of the reasons that parents refuse to give birth to new children.
In addition, the Chinese authorities have tightened the requirements for food delivery services. They were ordered to improve working conditions, increase wages, and provide employee insurance. After that, the shares of the food delivery services collapsed. For example, Meituan sank 14% on the Hong Kong stock market.
As expected, international investors got scared and the sell-off began. To calm the markets, the Chinese regulator called a virtual meeting with executives from the main investment banks. The following day state media published a series of articles suggesting that the drop has been exaggerated, while some analysts have speculated that funds linked to the government have begun to intervene to prop up the market.
Even though, a couple of days later another internet giant got under “attack” – China’s undisputed leader in the streaming music market, Tencent. To be more precise, the regulator accused the company of anti-competitive practices and urged it to give up its exclusive music rights. Besides that, China is also considering tightening the conditions for its companies to be listed abroad. The question then is who will be next?
Speaking of the Fed, the committee finally acknowledged that the economy is getting closer to meeting inflation and labor market targets. However, it will take some time before the regulator can begin to cut its QE policy. Therefore, for the moment, the members of the Fed voted to keep the target range for the federal funds rate at 0-0.25%. In addition, the Fed said a total of $ 120 billion monthly, including US Treasuries for $ 80 billion and mortgage bonds for $ 40 billion, “until significant progress is made toward the goal of maximum employment and price stability.
However, the main worry today is the US debt ceiling. Long story short, the Republicans’ refused to increase the country’s indebtedness before August 2. To solve the problem, Congress must either suspend the limit again or raise it to a certain level. When the state debt cap is reached, the U.S. Treasury has no choice but to rely on cash balances in accounts (about $ 450 billion at the end of July) and receipt of revenue minus planned budget expenditures, as well as “emergency measures” to finance its obligations.
It is very unlikely that the US government will admit a default on its debt, but it is worth noting that any credit event that affects US Treasuries will have repercussions both on the US and global financial systems since they are the world’s preferred risk-free asset and are vital as a guarantee for interbank liquidity.
Talking about companies’ earnings, the rapid spread of the Delta variant of the coronavirus and the increase in inflation have been causes for concern. As a result, the shares of most tech companies fell, even despite astonishing data. On the other hand, the market is afraid of lower sales growth, and this is even though Alphabet announced net profits of $36,455 million between January and June 2021, which is 2.6 times more than the benefits from the same period last year. Apple, for its part, reported profits in the first nine months of its fiscal year of 74,129 million dollars, 66% more than in the same period of the previous year. And Microsoft’s net profit for the whole of its fiscal year 2021 rose to 61,271 million dollars, 38% more than in the same period last year.
